When it comes to earning something back from credit card spending, we've always been big fans of the simplicity of cashback credit cards. However, you may find it more advantageous to use a rewards credit card, for several reasons.
To illustrate how rewards credit cards can sometimes be better than their cashback counterparts, let's use a real world example. In the cashback card corner, we have the American Express Platinum Cashback Everyday credit card. Representing rewards, we have the American Express Preferred Rewards Gold charge card.
In our example, £6,000 is spent on each card over the course of a year, with £2,000 spent in the first three months and £2,000 of the other £4,000 spent in major supermarkets and petrol stations over the following nine months.
The Platinum Cashback Everyday card pays 5% on up to £2,000 spending in the first three months, so that's £100 earned. This card then pays tiered rates of cashback on total spending. As an additional £4,000 has been spent, this earns cashback at 1%, which equates to £40. So that's £140 in total.
Now, using the same amounts on the Preferred Rewards Gold card, the £2,000 spending in the first three months gives an introductory bonus of 20,000 American Express Membership Reward points.
Now if you like to shop at the likes of Amazon, M&S, Homebase, Gap and House of Fraser, you can convert these points into £100-worth of gift vouchers. That's equal to a 5% return – equal to the value of the introductory bonus on the Platinum Cashback Everyday card.
After the introductory period, you earn virtually one point for every £1 spent, with double points on spending at supermarkets and at petrol stations. So with £2,000 earning around two points and £4,000 earning around one point, that's 6,000 more points. Redeem 5,000 points for another £25 gift card, so we're now at £125 of rewards.
Transfer the 1,000 points to Nectar and use them to get £5 off a whole range of shopping or entertainment options. So that's £130. Plus you get two airport lounge passes a year, which are worth £34.50-£60. So at the very least that's £164.50 of rewards. Of course, the lounge passes are only useful if you plan to fly during that year, but if you do it's a very nice perk.
What's more, you'll receive those first 20,000 points not long after you've spent £2,000, so you can claim your £100 gift vouchers mere months after you first have the card.
On the other hand, with the cashback you have to wait until the 13th month you've had the card.
So if your card membership starts on 1st December 2013, you'll have to wait until December 2014 for your money to be credited.
So not only does the rewards card beat the cashback card on value, it also beats it on speed.
Things to watch out for
Both of the cards featured are free, but the Preferred Rewards Gold card is only free for the first year. After that, it's £125 a year, so cancel it sharpish if you don't fancy paying that.
Of course, you should pay off your balance in full each month, otherwise your earnings are just eaten up by charges. As the Preferred Rewards Gold card is a change card, and not a credit card, you can't just make a minimum payment anyway.
Top rewards cards
The introductory offer definitely makes the Preferred Rewards Gold card a market leader.
Now let's have a look at some other top rewards cards and what they look like in cash terms.
Again, we've gone for an annual spend of £6,000 in the first year, of which £2,000 is spent the first three months and £2,000 is spent on fuel and supermarket shopping (half on each) over the next nine months. For the sake of simplicity in the Nectar and Clubcard examples all of that latter £2,000 has been spent at either Sainsbury's or Tesco stores and petrol stations respectively.
Based on this like-for-like comparison, the American Express Nectar would beat all the free cashback cards out there if it wasn't for its £25 fee. However, it's worth remembering that you can also earn points on your Sainsbury's spending if you have a Nectar loyalty card, which will push the total cash value of £150 past the Platinum Cashback Everyday card. The same principle of course also applies to Tesco and Clubcard.
As you can see, with the exception of the Clubcard, the introductory bonuses do also make a significant difference. But the same applies to cashback cards.
So you might want to take a card out for a year and then switch to another reward card or a cashback one.
Ultimately, while cashback cards can be simpler, depending on your lifestyle they may not always be the most rewarding – at least for a while.
Compare top rewards credit cards